The smooth ride up for US stocks seems to have ended as investors grapple with the good news of slowing inflation and likely rate decreases by the Fed, alongside the potentially bad news that the reason for inflation coming down is that the entire economy might follow it downward. Dropping rates slowly may not be enough to prevent this.
A very strong year for US stocks appeared to have ended in mid-July with a sharp drop into early August, only to be followed by an equally fast rise back to yearly highs by late August—only for much of that to evaporate in early September. Bonds have been steady gainers for the last few months as, at least, the rate environment seems predictable, even if the economy and corporate earnings growth are not. With foreign markets and bonds improving, we once again posted good returns relative to the US market and a globally balanced portfolio.
There seems to be growing confidence that rates will plunge with slowing inflation and that a safe 5% return will soon be a thing of the past. It might be. What is less clear is the future for longer-term rates. If too much money chases too few non-stock investments, we may see 2–3% long-term rates again. However, many investors lost a lot in recent years when longer-term rates climbed fast (including us), so the demand for 2% long-term bonds may not be strong anytime soon — even with falling inflation. Perhaps we’ll see a more normal steep yield curve, where short-term rates are 2% and long-term rates are 4% or higher, which could lead to losses for those buying longer-term bonds now, even though rates are still well above the lows of a few years ago.
The completely nonsensical ramblings about future fiscal policy from both candidates probably aren’t helping, unless you believe tariffs, new tax cuts, or taxing unrealized capital gains are somehow magical solutions to reducing frightening budget deficits—ideas that were tried with poor results in the 1920s here and, in the case of wealth taxes, more recently in France. The only wealth taxes that work (defined as bringing in substantial revenue) are on things that can’t be moved to another country, like homes and sometimes cars. The only tariffs that bring in significant revenue are those that aren’t reciprocated. Perhaps this is irrelevant—politicians always dodge the harsher realities of budgets. More recently, though, they seem to not care about the longer-term effects of populist policies.
In our own portfolios, we saw 2%+ returns in our bond funds (excluding the short-term cash-like fund BondBloxx Six Month Treasury ETF (XHLF)) as rates declined. iShares JP Morgan Em. Bond (LEMB) was further boosted by a falling dollar, as our future rate advantage over other countries seems less enticing to global investors.
Our Brazil fund Franklin FTSE Brazil (FLBR) rebounded sharply in August with a 7.05% return, somewhat odd given oil and commodity prices dipped, which generally is not great for a country with such a high percentage of economic activity from natural resources. Much of this was just a rebound from a sharp drop in stock prices in previous months. Latin American stocks in general had a good month, up over 4%, though, like Brazil, they are still down for the year—essentially the only weak area globally in stocks in 2024 other than China still down slightly for the year. Some of this may be attributed to Brazil’s well-above-average dividend yields in a now-falling rate environment. Other yield-heavy stocks also did well last month, including real estate stocks globally and utilities, the latter almost matching the S&P 500 this year with an 18.8% return.
The only weak areas in our portfolio, besides shorting junk bonds and Nasdaq stocks, were Franklin FTSE South Korea (FLKR), down 1.08%, and Franklin FTSE China (FLCH), which was barely up at 0.35%. Crypto was weak, so we saw gains in our inverse Crypto ETF, and our ETF that shorts lower-quality names LeatherBack L/S Alt. Yld. (LBAY) even scored a 3.11% return, while poor returns in retailers helped push ProShares Decline of Retail (EMTY) up 2.14%. We may have reached maximum rebound from the 2022 crash lows in Covid bubble stocks and crypto, which tanked in 2021–2022 only to rebound sharply through early 2024.
August 2024 Performance Review
The smooth ride up for US stocks seems to have ended as investors grapple with the good news of slowing inflation and likely rate decreases by the Fed, alongside the potentially bad news that the reason for inflation coming down is that the entire economy might follow it downward. Dropping rates slowly may not be enough to prevent this.
A very strong year for US stocks appeared to have ended in mid-July with a sharp drop into early August, only to be followed by an equally fast rise back to yearly highs by late August—only for much of that to evaporate in early September. Bonds have been steady gainers for the last few months as, at least, the rate environment seems predictable, even if the economy and corporate earnings growth are not. With foreign markets and bonds improving, we once again posted good returns relative to the US market and a globally balanced portfolio.
Our Conservative portfolio gained 2.34%, and our Aggressive portfolio gained 3.18%. Benchmark Vanguard funds for August 2024 were as follows: Vanguard 500 Index Fund (VFINX) up 2.42%; Vanguard Total Bond Index (VBMFX) up 1.33%; Vanguard Developed Mkts Index (VTMGX) up 2.87%; Vanguard Emerging Mkts Index (VEIEX) up 1.07%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.99%.
There seems to be growing confidence that rates will plunge with slowing inflation and that a safe 5% return will soon be a thing of the past. It might be. What is less clear is the future for longer-term rates. If too much money chases too few non-stock investments, we may see 2–3% long-term rates again. However, many investors lost a lot in recent years when longer-term rates climbed fast (including us), so the demand for 2% long-term bonds may not be strong anytime soon — even with falling inflation. Perhaps we’ll see a more normal steep yield curve, where short-term rates are 2% and long-term rates are 4% or higher, which could lead to losses for those buying longer-term bonds now, even though rates are still well above the lows of a few years ago.
The completely nonsensical ramblings about future fiscal policy from both candidates probably aren’t helping, unless you believe tariffs, new tax cuts, or taxing unrealized capital gains are somehow magical solutions to reducing frightening budget deficits—ideas that were tried with poor results in the 1920s here and, in the case of wealth taxes, more recently in France. The only wealth taxes that work (defined as bringing in substantial revenue) are on things that can’t be moved to another country, like homes and sometimes cars. The only tariffs that bring in significant revenue are those that aren’t reciprocated. Perhaps this is irrelevant—politicians always dodge the harsher realities of budgets. More recently, though, they seem to not care about the longer-term effects of populist policies.
In our own portfolios, we saw 2%+ returns in our bond funds (excluding the short-term cash-like fund BondBloxx Six Month Treasury ETF (XHLF)) as rates declined. iShares JP Morgan Em. Bond (LEMB) was further boosted by a falling dollar, as our future rate advantage over other countries seems less enticing to global investors.
Our Brazil fund Franklin FTSE Brazil (FLBR) rebounded sharply in August with a 7.05% return, somewhat odd given oil and commodity prices dipped, which generally is not great for a country with such a high percentage of economic activity from natural resources. Much of this was just a rebound from a sharp drop in stock prices in previous months. Latin American stocks in general had a good month, up over 4%, though, like Brazil, they are still down for the year—essentially the only weak area globally in stocks in 2024 other than China still down slightly for the year. Some of this may be attributed to Brazil’s well-above-average dividend yields in a now-falling rate environment. Other yield-heavy stocks also did well last month, including real estate stocks globally and utilities, the latter almost matching the S&P 500 this year with an 18.8% return.
The only weak areas in our portfolio, besides shorting junk bonds and Nasdaq stocks, were Franklin FTSE South Korea (FLKR), down 1.08%, and Franklin FTSE China (FLCH), which was barely up at 0.35%. Crypto was weak, so we saw gains in our inverse Crypto ETF, and our ETF that shorts lower-quality names LeatherBack L/S Alt. Yld. (LBAY) even scored a 3.11% return, while poor returns in retailers helped push ProShares Decline of Retail (EMTY) up 2.14%. We may have reached maximum rebound from the 2022 crash lows in Covid bubble stocks and crypto, which tanked in 2021–2022 only to rebound sharply through early 2024.